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Indirect tax receipts to see small, brief hit
November, 30th 2016

The Centre expects indirect tax receipts will take a slight hit in the wake of demonetisation, though it may take a month or two to make a more accurate estimate of the impact the move will have on direct and indirect tax collections, a senior Finance Ministry official said.

“We will know about how much direct taxes will increase by only in a month or two,” the official, who did not wish to be identified, told The Hindu. “It is too early to tell right now. Indirect taxes will take a hit, but it will be a small hit and they will recover soon,” the official added.

Tax experts and economists expect that demonetisation will result in a significant increase in bank deposits and a marked year-on-year increase in the government’s direct tax collections.

Indirect tax collections, on the other hand, are likely to be hurt by a significant slowdown in services sector activity in the coming quarters following the cash crunch, according to these experts.

Ambit Capital recently cut its projection for growth in the services sector this fiscal to just 4 per cent, from an earlier estimate of 8.9 per cent.

It also revised downwards its services sector growth projection for FY18 to 7.3 per cent from an earlier projection for 9.9 per cent.

“For a couple of months, business will be hit,” Surendra Prakash Singh, Senior Director at Deloitte India, said. “But the government might be expecting that business might pick up after loans start being given out due to the increase in deposits from demonetisation.”

However, the government can expect a significant increase in direct tax collections, Mr. Singh added.

Indirect tax receipts — including central excise, service tax, and customs — rose 26.7 per cent in the April-October 2016 period compared with the collections in the same period of the previous year.

Net service tax collections stood at Rs.1.43 lakh crore as compared with Rs.1.12 lakh crore during the corresponding period in the previous financial year, a growth of 26.9 per cent.

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